Banks with exposure to energy companies will suffer
In 2015, we saw energy companies’ earnings suffer due to falling oil prices. Now this effect has trickled down to the banks (XLF) that have exposure to these companies through the loans they’ve provided.
US banks have had a rough start to the year as oil prices have continued southward. Major banks have large oil and gas loan portfolios, and with the drop in oil prices, collateral on these loans is losing value. As such, banks have increased provisions for losses on these loans.
JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C) have increased provisions for loan losses tied to the energy sector. Banks with direct exposure to the energy sector are more vulnerable to falls in oil prices. Bank of America, with its $21.3 billion exposure, leads the way among its peers.
Bank of America’s energy-related exposure
Bank of America expressed concerns over weak oil prices after it reported better-than-expected earnings for the quarter. For 4Q15, Bank of America (BAC) increased its provision for credit losses in the global banking business by $316 million, primarily due to higher charge-offs related to energy loans and reserve increases for energy exposure.
On an earnings call earlier in the year, chief financial officer Paul Donofrio said that BAC had $21.3 billion worth of loans with energy-related exposure. This represents approximately 2% of its total loan portfolio. Donofrio also mentioned that provision expenses could rise to $900 million if the energy sector continued to be hit by falling oil prices.